As any parent knows, providing for your children does not magically stop as soon as they turn 18. Therefore there is now a very good reason to review, restructure and potentially increase payments following the Government’s ISA announcements in the Budget 2016. When combined with the existing inheritance tax rules for regular gifts out of income, an annual benefit of £5,000 to your children could potentially cost you as little as £2,400.
The new “Lifetime ISA” will be available for those aged between 18 and 40 from 6 April 2017. The Government will add 25% to the amount saved, subject to a maximum of £4,000 p.a. There is no requirement that the savings come from the person named on the accounts so parents, grandparents or other relatives could, potentially, make payments into these new accounts.
So by making annual gift of up to £4,000 (per child) the government will contribute £1,000. Where there is a regular pattern of gifts from income that you do not require to maintain your usual standard of living the gift is treated as exempt from inheritance tax (as opposed to gifts from capital which are potentially exempt and subject to the 7 year rule). It is important to maintain records to support the regular pattern of gifts from income should HMRC ever require evidence. Where your estate exceeds the nil rate band and you are liable to inheritance tax at 40%, the transfer of £4,000 achieves a £1,600 saving. Transferring £5,000 p.a. to your children for a net cost of £2,400 may therefore be an attractive option.
If your child is 40 on or before 6 April 2017 they won't be eligible to apply for a Lifetime ISA (7 April 1977 is cut-off date). However, even where they are born after this date they still need to open the ISA before they’re 40. The good news is that once it’s open you can keep contributing and they would continue to get the bonus until they’re 50.
The lifetime ISA does have certain restrictions. They can only be used for either first-time buyers of residential property (funds can be used at any time, provided the Lifetime ISA has been held for 12 months or more) or alternatively, (to benefit from the government contribution), the funds must be accumulated and become available for withdrawal at the age of 60. Under both options, there is no tax payable when the money is withdrawn.
For further advice about inheritance tax planning, contact your local Moore office.